Jonathan Clements's Blog, page 240

Reluctant Spenders

A 2021 SURVEY by the Employee Benefit Research Institute found that three-quarters of retirees said the value of their financial assets was the same or higher than when they first retired. This finding was consistent from the poorest respondents to those with the most wealth. The typical time in retirement for the respondents was seven to 10 years.

One implication: Retirees may be underspending their accumulated wealth. EBRI examined five reasons for this possible underspending:

Saving assets for unforeseen costs later in retirement
Don���t feel spending down assets is necessary
Want to leave as much as possible to heirs
Feel better if account balances remain high
Fear of running out of money

The first two reasons���"saving for tomorrow��� and ���no current need to spend������were reported by almost half of respondents. By contrast, a ���fear of running out of money��� was mentioned by only a fifth of those surveyed.

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Living With Insecurity

HOW DO YOU STAY centered when markets plunge and volatility is off the charts? One of the ways I cope is by pulling out a wonderful financial book to reread.

In 1951, Alan Watts wrote The Wisdom of Insecurity: A Message for an Age of Anxiety. But his message is as timely today as it was then. ���There is a feeling that we live in a time of unusual insecurity���. Human beings appear to be happy just so long as they have a future to which they can look forward���whether it be a ���good time��� tomorrow or an everlasting life beyond the grave.���

Needless to say, there isn���t a chapter about stocks, mutual funds or financial planning in the entire book. Watts was an American Buddhist teacher who encouraged people to do everything to be aware and conscious of the present moment and not spend so much time planning for a future that never truly materializes, at least in the way we think it will.

Given the trillions of dollars we spend on ���security��� in this country���financial, internet, home and homeland, to name a few���we don���t seem to do a good job of living in the insecure todays and tomorrows that are part of life. Planning and preparing aren���t bad things, of course. But what happens when the things we put our faith in start to break down?

I preached a sermon in January 2009 titled The Wisdom of Financial Insecurity. I reflected on the financial bloodbath we���d experienced in 2008. My retirement portfolio dropped 36% and, despite making regular contributions for the previous five years, it was worth less than it had been at the end of 2003. My wife was also in the midst of her second bout with breast cancer. I needed some reminders that, when the future looks uncertain, we have the tools to make it through to better days.

The message I delivered that Sunday isn���t much different from what I would deliver today. The greatest wisdom we can find in financial���or any other���insecurity is to recall those things nearest and dearest to us: our values, our love for others and the practices of our spiritual lives. Such things rarely change.

The rollercoasters of financial markets and life are always going up and down. My wife recovered and is cancer-free more than 12 years later. Our retirement portfolio has quadrupled over those 12 years. I still get a little insecure when the markets and life inevitably change. But I do my best to remember and practice those things that provide me peace and faith.

We humans have been struggling and living with insecurity throughout our existence, which is why ancient wisdom is so helpful. The Talmud instructs that, ���The rich man is the man who is satisfied with what he has.��� That���s the security and the riches I yearn for.

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The Unfriendly Skies

I WAS AN AIRLINE pilot for 42 years before retiring about a year ago. Traveling was the job and, of course, the opportunity to fly free on days off was a big deal. That meant more traveling. Now retired with kids and grandkids scattered around the country, my lovely bride and I continue to fly regularly.

Planning your next trip? Here are nine tips to make the inevitably stressful experience a little better:

Never book a trip with connecting flights unless it���s absolutely necessary. Bad things happen when connections are missed. Go nonstop when you can. It makes a huge difference.
If you have to connect, don���t book a connecting flight that���s the last flight of the day. Instead, as a backup, make sure there���s at least one later flight. If you can, start a day with connecting flights early to midmorning. Be prepared for delays and cancellations. Connecting might be a cheaper ticket, but it can end up costing you more in the long run.
When I was working as a pilot, employee parking was free.��Now, I have to pay.��Airport parking fees can be outrageous depending on the airport.��It can also be a hassle with late and overcrowded buses.��If our trip is longer than a few days, we���ll use Uber because it���s cheaper and much more convenient.��This also will save you 20 minutes or more on each end of the trip.
TSA PreCheck is essential. It makes some of the nonsense go away. Sign up online and then go do the required interview. It���s absolutely worth the price and onetime inconvenience.
Drive when you can. We draw a six-hour drive circle around our house. If we���re within six hours, we���re in the car. The airport experience and the hassles associated with flying these days make driving a much less stressful trip. That���s true even with gas prices where they are today.
If possible, find a smaller airport near your destination, such as Melbourne, Florida, instead of Orlando. Smaller is better���assuming you can get there nonstop. You���ll find every line is less crowded. For many major airports, you���ll be surprised by how many smaller airports are nearby and served by a number of airlines. An added bonus: Tickets are often less expensive.
Enroll in a rental car company���s ���fast break��� program. Generally, this will get you into your rental with little or zero time in line. This is really important both coming and going. It���s helpful to end or start a stressful travel day without frustrations in a car rental line, plus these programs are free.
Never check bags if at all possible. We can pack for a weeklong trip in a carry on. Figure out how to do it. You generally never wear all the clothes you pack anyway. Of course, you can���t check golf clubs or skis. Look into shipping them separately. We do that frequently to avoid the luggage carousal, as well as the chance of losing our luggage.
Don���t stop at the first restroom you see after deplaning.��Everyone from your flight will be in there.��Pass that one up and maybe the next one, too.

Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Faced with this upheaval, he also had a side business as a homebuilder. Today, Tom and his wife still travel extensively.��Three children and seven grandchildren keep them on the go.

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Check the Price

YOU MIGHT ASK, ���What makes an exchange-traded fund the best?��� While it���s hard to say for sure which are the right funds to own, it���s often easy to spot a fund that should be tossed to the curb.

Take the iShares suite of exchange-traded index funds (ETFs). Did you know iShares offers two nearly identical emerging markets funds, iShares MSCI Emerging Markets ETF (symbol: EEM) and iShares Core MSCI Emerging Markets ETF (IEMG)? The only material difference is what you pay. EEM���s expense ratio is 0.7%, or 70 cents a year for every $100 invested, while IEMG���s expense ratio is a tiny 0.11%.

IEMG���s net assets are larger than EEM���s, as they should be, but investors are still collectively doling out tens of millions of dollars in excess fees by owning EEM instead of the less-expensive IEMG.

The 0.59 percentage point difference might not sound huge, but consider the impact on investment compounding. If you invested $10,000 today in IEMG instead of EEM, you���d save more than $11,000 over the course of 30 years, assuming a 7% annual pre-cost return.

A similar, though less drastic, expense gap exists between iShares MSCI EAFE ETF (EFA) and iShares Core MSCI EAFE ETF (symbol: IEFA). The difference in their expense ratios is only 0.25 percentage point.

As you check on your investments around year-end, be sure to review fund costs. You might be able to save yourself more than a few bucks by swapping to a lower-cost alternative. But be warned: If you make the swap in a regular taxable account, you might trigger a large capital-gains tax bill. That, presumably, is why almost $29 billion still languishes in iShares MSCI Emerging Markets ETF paying 0.7% a year.

One final point: Vanguard Group has received a lot of criticism in recent years, especially for its customer service, and deservedly so. Still, it���s hard to imagine Vanguard treating shareholders of one or two funds so inequitably. BlackRock, manager of the iShares ETFs, clearly has no such scruples.

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Try the Elvis

ECONOMICS IS ABOUT supply and demand. Call me biased, but I think why people demand particular goods and services is a whole more interesting than how suppliers do their thing.

It seems, however, that the topic of supply is unavoidable these days. We���re all hearing about supply chain woes. We���re all tired of seeing the empty shelf where our favorite crackers used to sit.

Even though economists will scream from the tallest Federal Reserve Bank building that supply and demand are separate and independent variables, let���s look at what���s going on with supply chain shortages���and how consumers can get some relief.

First, consumers need to understand that almost no desired good is actually a single thing. Goods are made up of multiple parts, each supplied to the ultimate manufacturer. Think of a car. Even if it says "Made in America" and you assume there are no import issues, the car itself is built of parts made in factories around the world. They���re connected by a huge transportation web that ultimately leads to the car dealer���and then to you.

A disruption in any key part, such as one made in China or Mexico, can slow or even stop up��the whole works, causing a shortage. If transportation is interrupted���as with the Suez Canal��closing in 1956���the ultimate good can't be made or delivered.

To save costs, there are few��redundancies built into modern supplies lines. We���re all paying for that now. The average American may not regularly travel abroad these days, but many of our products��are still world travelers. The production line is a highly interconnected network, which most of the time is a good thing. Just not now.



Are there things we can do on the demand side to lessen this circumstantial hit to our consumerism? Here are three ideas that may help.

Expand your suppliers. Yes, it���s more convenient to have Amazon drop stuff at your door or take a short drive to your local market. But that limits your choice, and choice is the key to economic empowerment. Try going to a different area of town. Ask friends and on social media where products might still be on the shelf. I���ve found that a lot of the stuff missing from my side of town is on the other side. I've also found smaller online ordering sites that have things that the big sites don't.

Lose the nonessential. Pink may be your favorite color. But if pink earphones are scarce, evaluate what���s the truly essential attribute of the product. Sound quality is vital in earphones. Color preference can be surrendered.

We all want to impress others with the items we own. But we should consider whether a cheaper���and more useful���version of what we want would be better, especially given today���s shortages. Again, it's all about expanding our choice.

Look for substitutes. Economists love to fancy up simple concepts. You like turkey, but the store is out, so you go for chicken, roast beef or even veggie as an alternative. These are called��substitutes in economics. Like potential partners waiting on the side of the dance floor, substitutes are happy to step in if your usual partner doesn't show. You might even discover a new favorite.

In economics classes, substitutes are usually taught along with the concept of complements. What are those? They���re products that go together like interdependent accessories.

For instance, if you always prefer a peanut butter sandwich with grape jelly, they are complements for you. If there���s no grape jelly, you can sulk and throw out the peanut butter. Or maybe you can try peanut butter and strawberry jelly���or even an "Elvis." The singer���s favorite sandwich was peanut butter, banana and bacon. Trust me: It feels like a hunk of burning love going down.

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim���s newest is Enough Stuff, a story about appreciating family and friends���rather than gifts���during the holidays. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.

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Not Average

I REMEMBER TALKING to a guidance counselor in high school. The meeting was supposed to help me decide which career path I might follow after graduation. As part of my assessment, I���d taken a skills inventory test designed to narrow down jobs I was potentially suited for. Nearly 40 years later, I still remember three of the suggested occupations: tour bus driver, police officer and veterinarian.

In the end, I didn���t choose any of those careers. Instead, I���ve spent more than 30 years working in laboratories. For the past 24 years, my official job title has been ���Biology Laboratory and Stockroom Manager.���

Working as a departmental manager at a small liberal arts college isn���t an exciting or glamorous job. It is, however, a job well-matched to both my skill set and my personality. As an introvert, I enjoy the fact that I work independently, with little direct supervision. My job also requires a high degree of attention to detail, as well as organizational and planning expertise. As a perfectionist, I���ve got those skills in spades.

Lately, I���ve been spending a lot of time thinking about my career choice. I certainly don���t feel passionate about what I do. With so much talk about the Great Resignation, I wonder if the time is right to move on to something different.

As part of my career exploration, I decided to see how my salary stacked up against my peers. What I discovered was���depending on the statistics examined���I���m either grossly underpaid or generously overcompensated.

My current salary of $78,000 a year appears to be well below the average wages for a laboratory��manager. I do, however, receive a generous benefits package and I���ll have access to an early retiree health insurance plan when I retire.

If I compare my salary to women of the same age, I���m definitely ahead of the game. At age 54, the average American woman makes just over $52,000 a year. I suspect my higher wages are due, in part, to my work history. In 30 years, I���ve never taken an extended leave to care for a child or parent.

As a final method of comparison, I looked at the average salaries of workers who hold master���s degrees in biology. Here, too, I find my salary is higher than the national average. But how does one accurately compare the value of two workers with similar educational backgrounds but vastly different work histories? Someone in their mid-50s, with 30 years of experience, should expect to earn far more than a 20-something recent graduate.

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Yardeni Speaks

MARKET STRATEGIST and economist Ed Yardeni says the current bull market is ���the most hated and feared bull market that any of us have experienced, maybe in history.��� This quote came from an interesting interview published in ThinkAdvisor, a magazine for financial professionals.

Worried about today's lofty stock prices? You may find Yardeni���s views comforting. When asked about his market outlook, he commented on the strength of the current bull market, which started in 2009. He claims to have identified 71 market ���panic attacks��� during that stretch. One of the most recent happened the day after Thanksgiving, when the Dow Jones Industrial Average dropped 905 points, or 2.5%. This was in reaction to a World Health Organization report that Omicron, the new COVID-19 variant, had been detected in South Africa.

Yardeni said that, looking back, all 71 panic attacks were buying opportunities. In fact, while we had a brief bear market in March 2020, Yardeni said it was actually ���more of a panic attack.��� He doesn���t expect the bull to let up for several years. He believes the market isn't concerned that inflation will spin out of control, like it did in the 1970s.

His explanation for this: Productivity growth has been on the rebound since 2015. Current productivity is growing at around 2% a year. He believes it���ll accelerate to 4% by the second half of the decade. This would help offset some of the inflationary pressures and allow wages to rise faster than prices.

Today's inflation is due to a combination of the Federal Reserve���s stimulus and the Biden Administration���s American Rescue Plan (ARP), Yardeni believes. The funds provided by the ARP created a ���demand shock��� that ���overwhelmed the supply system.���

Yardeni thinks we���re learning to live with the COVID-19 virus and its variants. He doesn���t foresee further large-scale lockdowns, but possibly localized versions to attack local flare-ups.�� He said we���ve seen ���extraordinary economic strength and growth��� since April 2020.

Interested in keeping up with the markets and the economy? I���d encourage you to check out Yardeni���s website, which offers an enormous amount of free financial and economic data.

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Elderly as Insult

���HELP, I'VE FALLEN and I can't get up.���

It wasn���t too many years ago that I viewed that commercial as humorous. No more. A few days ago, my wife slipped on a curb and fell. No serious injury, just a cut on her lip and a scraped leg. But she couldn���t get up. Thankfully, my sons were there to help. I couldn't do it on my own. My wife���s arthritis makes it difficult for her to walk long distances or climb stairs, hence our move to a one-floor condo.

I still play golf a couple of times a week during warmer weather, and I hit the ball reasonably well for my age. I easily pick the ball off the green, but reaching to the bottom of the cup is challenging.

I like to drive my car. I find it relaxing. Given that we can���t travel to Europe, we���re planning another road trip, this time to Florida. After driving several hours, getting out of the car is a mini-project. There���s a general stiffness that takes a few minutes to wear off.

For all of the above, there is one thing in common���aging. It wasn't until a few years ago, when I reached age 75, that the aging thing started to kick in. Now it���s a daily reality. I���m raring to go at 5:30 a.m., but by 3:30 p.m. a short nap is no longer a joke but a necessity. Well, not a necessity, but���if I stop moving���a fact. It���s just automatic: I sit, I sleep.

Don't get me wrong, we try to keep active. We both track our steps every day���I love my Apple Watch. We usually log two miles or more. While I was quarantined���both times���I walked two miles each day inside our condo. The view was a bit boring, I���ll admit.

There���s no way to escape aging. Well, there is a way, but not a desirable one.

What bugs me more than the minor physical decline is the vibe I get from others. I can tell from the way they talk to me and offer to help that they���re thinking ���senior citizen.��� Elderly���oh, how I hate that word. How easy it is for people, especially salespeople, to look at you and conclude you fit the senior stereotype: low income, living on a fixed income, in need of discounts.

I know I look old, but do I look poor as well? Sometimes that perception is insulting. You���re spoken to as if you can���t afford the purchase being considered. I get a bit of unspoken satisfaction in knowing that my income is higher than any salesperson with such an attitude.

The fact is, most seniors are doing okay financially, often better than the general perception. The median��income for seniors is little different from that of younger Americans. Seniors with a perceived low income are likely to have been lower-income all their life. Many seniors tell me that they live comfortably on less than $40,000 a year in retirement.

My one money concern is that something will interrupt our plans for leaving a legacy to our children and grandchildren. I also think about making our finances easier to manage. To that end, I am in the process���finally���of consolidating our accounts with one financial organization.

Yes, there are the aches and pains, the occasional need for assistance, and the annoying attitudes. Still, those of us who have earned the senior badge and are still able to enjoy life���and who are financially secure���are very fortunate indeed.

I remember that every time I see someone���including my sister���in a wheelchair or struggling with a walker. Or when I think about my friends and colleagues who were unable to live to enjoy the elderly ���insult.���

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.

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Closing the Deal

I HATE BUYING CARS. I can���t think of too many sales transactions that are more loathsome. When I look back at all the times I purchased a car, the one with my father in 1976 was the most memorable.

I needed a new car. I was living in San Diego and often driving to Los Angeles to visit family and friends. My 1966 Volkswagen Beetle couldn���t take too many more trips.

I asked my father if he wanted to come with me to look at new cars. My dad was a nice guy. But he could also be quick-tempered and impatient. Those aren���t good qualities when negotiating the price of a car.

We went to a Lincoln Mercury dealer and I saw the new Capri. It was bright yellow and sporty looking. I���d like to say it was my dream car, but it wasn���t. My dream car was a Fiat Spider, but it was out of my price range.

The salesman was new at selling cars. He didn't know much about the car I was interested in. He told us he spent most of his career selling clothes. But I could tell why the dealership hired him. He could sell you anything.

The salesman said, ���We have to work together as a team when negotiating a price for this car. You want to buy a car and I want to sell you a car. But my manager has to approve the deal. He���s the one we have to convince.��� The way he said it made me feel like he was on our side.

The team concept didn���t last long. My dad grew impatient and got involved in the negotiations. We were close to a deal. But my father and the salesman were arguing over a last-minute price increase of $20.

I sat and watched them argue back and forth over a measly $20. Finally, I took out my wallet and laid a $20 bill on the table. I said, ���Here���s the $20 you're arguing over. Take it.���

I could tell by the look on my father���s face that he couldn���t believe what I just did. There was a brief silence. Then my father and the salesman started to laugh. The salesman gave me back my $20 and we quickly came to an agreement. I finally had a new car.

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Prophecy Fulfilled?

QUANTITATIVE EASING, or QE, has been the Federal Reserve���s policy of choice since interest rates reached their lower bound of 0%. The brainchild of then-Fed Chair Ben Bernanke, QE was launched in the midst of the 2008 financial crisis. Quantitative easing is simply a euphemism for bond purchases���Treasury bonds and mortgage-backed securities���by the Federal Reserve.

In theory, QE should lead to lower interest rates, as reflected in bond yields. Bond prices are, of course, subject to the forces of supply and demand. All else being equal, greater demand���such as from Fed purchases���drives up bond prices. And when bond prices rise, their yields fall.

Lower interest rates have a plethora of effects, both on the economy and financial markets. Low rates stimulate the economy and drive up the price of financial assets, hence the term quantitative easing. QE is widely assumed to result in looser financial conditions.

That���s all well and good, but financial markets are comprised of human beings, not machines. They react in ways that incorporate expectations of the future. I would contend that QE is as much a behavioral construct as it is a financial one. What does that mean for the stock market? We���ll find out in the months ahead, now that the Fed is winding down its bond purchases.

The Federal Reserve acknowledges that forward guidance plays a key role in its interest rate policy. That term, forward guidance, merely refers to the collective expectation of market participants about future interest rates. The Fed guides market expectations by carefully choosing the words it uses in press releases and speeches. If the market becomes convinced that lower interest rates are on the horizon, that expectation by itself can move markets far in advance of the actual interest rate cuts.

QE has a similar impact on investor psychology and behavior. Since the 2008 financial crisis, we���re now on something like the fifth round of QE. Along the way, we���ve experienced a largely uninterrupted bull market that has taken the S&P 500 from 666 to 4726. The one bear market since 2008 was precipitated by the COVID-19 pandemic. The market bottomed in March 2020, when the Fed announced its latest iteration of���you guessed it���QE.

Is the high correlation between QE and the rising stock market a coincidence? Correlation, after all, does not equal causation. While we may never know for sure, I believe QE is widely perceived as a tailwind for the stock market and has become embedded in the psyche of investors.

Here���s how this feedback loop works: Something bad happens to the economy or markets -->��Investors panic and sell financial assets -->��The Fed institutes or ramps up QE -->��Investors expect QE will lead to looser financial conditions and buy financial assets -->��QE has become a self-fulfilling prophecy.

This formula has worked splendidly for the past 13 years. U.S. stocks are up sevenfold over that period, not including dividends. This has enabled thousands to retire sooner than expected. What���s not to like about QE and investors��� Pavlovian reaction to it? Lots.



First, to be effective, each round of QE must be larger than the prior one. If QE has become a behavioral phenomenon, the psychological impact of a modest round of QE just won���t cut it. Like a drug addict, each dose of QE must be ever greater to provide the same investor high. Moreover, by printing ever-more dollars, the Federal Reserve may win the battle, only to lose the war���by debasing the dollar.

Second, before the Fed can lower interest rates, it must reduce, or taper, QE. That, at least, is the sequence of events the Fed seems to favor. This means that interest rates, specifically the federal funds rate, must be held lower for longer. Instead of simply raising interest rates, the Fed must first taper QE and then raise rates. In short, the Fed has built a longer runway between an overheating economy and tighter monetary policy. This greater lag may lead to more extreme economic cycles.

Third, and most important, the Fed now finds itself between a rock and a hard place, thanks to inflation. When inflation was tame, the Fed was free to pursue QE and a zero-interest-rate policy. Now that the Fed has all but admitted that inflation is no longer transitory, it���s a new ballgame.

The Fed must now pick its poison. QE and low rates may stimulate the economy, but will likely exacerbate inflation. On the other hand, withdrawing QE may tame inflation, but at the risk of triggering a stock market selloff. After all, if investors have come to associate quantitative easing with higher stock prices, won���t they view the absence of QE���or worse yet, quantitative tightening when the Fed sells its bonds���as the death knell for stocks? We���re now learning the answer.

Faced with stubbornly high inflation, plus the recognition that interest rates cannot be raised until QE has formally ended, the Fed announced this month that it would accelerate the taper of QE. Stock investors initially responded with enthusiasm, only for share prices to turn choppy. If QE has become a behavioral salve, investors may need to gird themselves for greater stock market turbulence.

John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.

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